How long is long-term? It depends ...

That's how Richard Russell, editor of the Dow Theory Letters advisory service, began his market summary Wednesday night. "If there are any clear trends," he continued, "I can't find them - with the single exception of oil, which is trending higher."

The current markets present advisers with a problem. Since almost all strategies are designed to exploit trends, advisers are finding it notoriously difficult figuring out what to do. (Journalists also find the current markets difficult, since they provide so little to write about - but that's another story ...)

I have a simple solution for dealing with trendless markets, however - one that easily makes them disappear: Focus on the longer term. That's because trendlessness exists only insofar as one focuses on nothing longer than the last couple of weeks or months.

To be sure, my solution will appear to be a copout to many of you. After all, almost any problem can be made to go away by expanding our focus to a long enough term. Can the "long term" be defined in a way that prevents it from being merely a refuge for scoundrels?

The Hulbert Financial Digest recently accepted this challenge and attempted to come up with a more precise definition of the long term. Their findings appeared in its February 2005 issue.

The HFD started by asking a question that gets rarely asked: How will we know when we have come up with a satisfactory definition of the long term?

The HFD argued that a primary characteristic that the correct definition will have is this: In all possible periods of that defined length, the proportion of advisers who beat the market should be more or less the same.

That's because advisers, on the whole, do not become appreciably more or less smart or shrewd. Any definition that makes it appear that this has been the case is a bad definition.

Consider the definition of the long term that says it lasts just 12 months. It turns out that this doesn't come even close to satisfying the prerequisite of a good definition. During all possible 12-month periods over the last decade, the proportion of newsletters beating the Wilshire 5000 index
SVH, -14.29%
varied by a huge margin.

Over the 12 months through September 30, 2002, for example, no fewer than 87 percent of the newsletters the HFD monitors beat the Wilshire on a risk-adjusted basis. At the opposite extreme, fewer than 1 percent of the HFD-monitored newsletters beat the Wilshire on a risk-adjusted basis over the 12 months ending November 30, 1995.

I think we can all agree that advisers in 2002 were not 87 times smarter or shrewder than they were in 1995.

How about 36 months, or three years, which is quite popular among individual investors? Morningstar's mutual fund ranking system, for example, places more weight on three year track records than performance over any other period.

But 36 months do no better job than 12 months. Over all possible 36-month periods over the last decade, the proportion of newsletters beating the Wilshire varies from a low of below 1 percent to a high of 91 percent. That is an even larger range than in the case of 12-month periods.

How about five years? Surely that is a long enough period to do the trick?

Nope. Over all possible 60-month periods over the last decade, the proportion of newsletters beating the Wilshire on a risk-adjusted basis ranges from below 1 percent to a high of 86 percent - virtually identical to the range in the case of 12-month periods.

Believe it or not, it was not until the HFD defined the long term as encompassing 10 years that it satisfied at even a minimal level the requirements of being a satisfactory definition.

Ten years may strike you as unnecessarily long, but the HFD's research shows that over periods shorter than this, you run too high a risk of concluding that an adviser is a genius when he has no ability - or of dismissing a great adviser because he has lagged the market.

And, of course, you realize an added benefit when focusing on 10-year periods: You never have to run the risk of thinking the markets are trendless.

Which newsletters have done the best according to the HFD's tracking over the last 10 years? The table below lists the top five performers on a risk-adjusted basis over the 10 years through Feb. 28:

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